Posts Tagged ‘banking’

No one has ever lost a penny on bank deposits insured by the Federal Deposit Insurance Corporation (FDIC), but there is a little-known hazard of having money in a failing bank.

Recently the Maritime Savings Bank (based in West Allis, Wis.) was closed by regulators and taken over by North Shore Bank. Depositors were informed that the interest rates on their CDs had been slashed. For some, that meant the interest on a CD that doesn’t mature until next spring will be paying about 0.5% instead of the 3.05% they signed up for a couple of years ago.

Many people are unaware that this is typical when the deposits and assets of a failed bank are sold by the FDIC to a strong institution. Although banks and regulators often remind consumers that FDIC-insured deposits are safe, the promised future earnings on a yet-to-mature CD at a failed bank are not guaranteed. (The ability of an acquiring bank to unilaterally cut interest rates applies only to deposits, not loans.)

Consumers are free to withdraw their money without incurring a penalty, but in today’s low-interest environment it may be hard to find higher CD rates. In part, that’s because many banks that get in financial trouble try to attract money by offering CD rates that are better than the local competition.

In a decision stemming from the savings-and-loan crisis in the late 1980s, the federal government allows banks that acquire failed competitors to lower the interest rates. At that time many institutions that were doomed to fail boosted their CD rates in an attempt to bring in more deposits and stay afloat. When they failed anyway, the FDIC was left with a bigger and more-costly mess to clean up.

Reducing the rates on CDs makes the acquisition more affordable for a bank that steps in. It also makes it more likely that the FDIC will be able to find a strong institution willing to take over an insolvent bank.

If you are interested in more details about this story, read the complete article found on jsonline.com.

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which permanently raises the current standard maximum deposit insurance amount to $250,000. The FDIC insurance coverage limit applies per depositor, per insured depository institution for each account ownership category.

The standard maximum insurance amount had been temporarily raised from $100,000 to $250,000, effective from October 3, 2008, through December 31, 2013. This permanent increase of deposit insurance coverage means depositors with CDs worth more than $100,000 but less than $250,000 will no longer have to worry about losing coverage on those CDs maturing beyond 2013.

Insured deposits provide peace of mind to depositors that their money is 100 percent safe – provided they keep their deposit balances within the insurance limits. The FDIC encourages all bank depositors who have questions about their insurance coverage to visit their website or call 1-877-ASK-FDIC.

Congress created the Federal Deposit Insurance Corporation in 1933 to restore public confidence in the nation’s banking system. The FDIC insures deposits at the nation’s 7,932 banks and savings associations and promotes the safety and soundness of these institutions by identifying, monitoring the addressing risks to which they are exposed. The FDIC receives no federal tax dollars. Insured financial institutions fund its operations.